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How Michael Kors Plans to Make Versace a $2 Billion Brand

(Bloomberg) -- Michael Kors has an ambitious plan to turn Versace into a multibillion-dollar business. Can it make it work?

Kors, which is changing its corporate name to Capri Holdings Ltd., announced Tuesday that it would buy Gianni Versace SpA for about $2.2 billion. It outlined a plan to more than double the high-end brand’s sales by opening about 100 new stores, investing in e-commerce and selling more accessories and footwear under the Versace label. It’s also looking to expand in Asia, eyeing markets including Japan and South Korea.

Kors Chief Executive Officer John Idol wants to turn Versace into a fashion label with $2 billion in revenue, igniting concerns that a business that size risks diluting the luxury brand. That would bring it into the ballpark of rival Prada SpA, but still less than a third the size of Kering SA’s Gucci label. Executives said they expect Versace to be an $850 million business this year.

“If you look at some of the other Italian luxury brands -- which will remain nameless -- they are doing in the billions of euros today,” Idol said on a conference call about the deal. “So Versace is terribly underdeveloped and that’s really going to change now that they’ll have the resources of Capri behind them.”

That means the Versace of the future may look a bit different, even though Donatella Versace will remain on as creative director. It will have a lot more stores, a lot more handbags and -- executives hope -- a lot more customers.

Here’s a look at some of the biggest changes to come:

Accessories

The new owner will look to grow Versace’s sales of accessories like handbags, leather goods and shoes significantly, to 60 percent of the brand’s total business from just 35 percent today.

The move will push the label, not best known for items like satchels and wallets, closer to an aggressively competitive market. Versace is renowned for its flashy baroque ready-to-wear clothing designed by Donatella, with her buzzy runway shows attracting attention for its brazen selection of tops, dresses and gowns. Idol said the potential growth in accessories will have the “biggest impact” on the business.

The luxury handbag space has already been getting more crowded as brands shift their focus away from the fickle business of designer clothing. Burberry Group Plc last year hired a handbag designer from Dior and bought its own leather-goods factory in Tuscany. LVMH tapped star designer Hedi Slimane to take over its Celine brand, known for its focus on sleek accessories, and has said it wants to double or triple the label’s unit sales over the next five years. Kering’s Saint Laurent has also pushed into leather goods in recent years, and now that group’s Balenciaga and Alexander McQueen brands are trying to do the same.

“The accessories side of the business is very underpenetrated, so there are good opportunities there. But they’re not alone,” said John Guy, an analyst at MainFirst Bank. “Not all brands are not going to achieve what they set out to do.”

Presence

Versace’s online business is nearly “nonexistent,” according to Idol. Kors has already invested about $100 million in building an e-commerce platform that can be used by multiple brands, and the company will quickly integrate Versace into the system. The CEO said he hopes online sales will eventually total more than $100 million, though he did not give a time frame.

Kors will also boost Versace’s existing store fleet 50 percent to around 300. New locations won’t be as large as the major flagships Versace has in cities like Milan, London and New York and they’ll focus on “untapped markets.” Idol expressed concern about the label’s shops, noting that they’re not as productive as they should be.

Asia

Asia represents a growth opportunity for Versace, with China leading a luxury rebound that’s lifting companies including Prada, LVMH and Kering. China’s growing middle class is a key target for upscale retailers. The demand for premium goods is gaining traction as an increasing number of Chinese families cross the income threshold to become affluent.

One issue in China is the lack of distribution control as third-party luxury goods retailers in the country hold selling rights to Versace products, said Bloomberg Intelligence analyst Catherine Lim. The merger could create an opportunity for the luxury brand to buy back the Chinese rights before expanding there, she said.

Idol identified Japan and Korea as other Asian markets with a lot of potential. Versace left Japan in 2009 and returned in 2015 with a few boutiques. The brand’s presence in Korea is “very, very small,” the executive said.

“The biggest challenge for Versace will be to re-energize the brand and make it relevant to younger generations, particularly in Europe and Asia,” Pascal Martin, partner at OC&C Strategy Consultants, said in a note Wednesday.

Reputation

Kors is buying Versace when the brand is at its hottest in years after a series of moves that put the fashion house back on the map.

In a tribute to founder Gianni last September at Milan Fashion Week, Donatella brought back the most iconic looks from his collections spanning the 1990s, including silk blouses mixing leopard prints with images of baroque architecture. She closed the collection by walking the runway herself, arm-in-arm with 1990s models including Carla Bruni and Cindy Crawford. Versace followed up with a viral interview by Vogue, and co-hosted New York’s Met Gala in May, dressing such social media icons as Gigi Hadid and Kim Kardashian for the event.

Some Kors investors will appreciate the push into riskier fashion, while others appear wary. The company’s shares tanked Monday as deal speculation swirled and gained almost 2 percent on Tuesday, after falling initially on the acquisition’s announcement. Meanwhile, Prada investors weren’t fazed by the heightened competitive threat, as the company’s shares jumped as much as 8.5 percent in Hong Kong trading on Wednesday.

“We understand and applaud the desire to think differently about what a modern portfolio means, but with Versace, investors will see more fashion risk,” David Schick, an analyst at Consumer Edge, wrote in a note to clients.

Donatella tried to convey a message of stability when she gathered staff in a meeting at the brand’s Milan headquarters this afternoon. She pointed out that as shareholders in the newly renamed Capri, the family remains committed to the business.